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Staff Papers Series
STAFF PAPER P80-9 APRIL 1980
ECONOMICS OF THE FOOD ANIMAL INDUSTRY
IN THE U.S.
W. B. Sundquist
r 1
Department of Agricultural and Ilpplied Economics
University of Minnesota
Institute of Agriculture, Forestry and Home Economics
St, Paul. Minnesota 55108
ECONOMICS OF THE FOOD ANIMAL 1NDUSTR%
IN THE U.S.
W. B. Sundquist
Staff Papers are published without formal review within theDepartment of Agricultural and Applied Economics
Table of Contents
Highlight Dimensions of Production and Consumption . . . . . . . . . . . . 2
Production. . . . . . . . . . . . . . . . . . . . . . . . , . . . . . 2Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Producer and Supply Side of Food Animal Agriculture. . . . . . . . . . 12
Inventory of Livestock Numbers 1960-78. . . . . . . . . . . . . . . . 12Structure of the Production Sector. . . . . . . . . . . . . . . . . . 14Production Technology and Efficiency. . . . . . . . . . . . . . . . . 19Economics of Size and Specialization. . . . . . . . . . . . . . . . . 21Income, Costs and Supply Response . . . . . . . . . . . . . . . . . . 26
The Consumer and Demand Side of Food Animal Agriculture. . . . . . . . . . 32
Domestic Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Effect of Price Changes on Demand. . . . . . . . . . . . . . . . 35Effect of Income Changes on Demand . . . . . . . . . . . . . . . 37Food Consumed Away-From-Home . . . . . . . . . . . . . . . . . . 41Diet andHealthConcerns . . . . . . . . . . . . . . . . . . . . 44Other Factors Affecting Demand . . . . . . . . . . . . . . . . . 45
Export Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Marketing and Distribution of Food Animal Products . . . . . . . . . . . . 48
Producer Markets. . . . . . . . . . . . . . . . . . . . . . . . . . “ “48The Marketing Bill.. . . . . . . . . . . . . . . . . . . . . . . . . c52
Transportation. . . . . . . . . . . . . . . . . . . . . . ● “ o “56processing. . . . . . . . . . . . . . . . . . . . . . . . . . . +58Wholesaling and Retailing. . . . . . . . . . . . . . . . . . ...61Food Service. . . . . . . . . . . . . . . . . . . . . . . . ● “ “65
Selected References.. . . . . . . . . . . s o 0 “ o “ * ● Q o 0 0 0 “ ● o ● 70
Staff Papers are published without formal review within theDepartment of Agricultural and Applied Economics
ECONOMICS OF THE FOOD ANIMAL INDUSTRY IN THE UNITED STATES:’
W. B. Sundquist~C~~
This paper has the objective of describing briefly the food animal
industry in the U.S. from an economic perspective so as to aid in the
subsequent identification of critical research needs relating to
production, marketing and distribution. It focuses on beef, pork,
lamb-mutton, and poultry meats produced for human consumption. In
addition it considers two other major animal product food sources,
dairy products and eggs. It thus excludes from consideration fish,
minor small ruminants, game animals and horses.
Because the food animal industry in the U.S. is extremely complex
and space here is very limited, exceptions can be found to almost any
generalization which can be made. And, some important topics will of
necessity be omitted from discussion. The seriously interested student
of the economics of the food animal industry should review the compre-
hensive literature which is available relating to this industry and to
its several subsectors.
This paper draws heavily on other published and unpublished reports,most of which are listed in the reference section. The section on
the producer-supply side, particularly, draws heavily, withoutquotation, on materials by H. Gilliam, R. Martin, G. Rogers andR. Van Arsdall in Lyle P. Schertz and others, Another Revolution inFarming?, USDA, 1979.
Professor, Department of Agricultural and Applied Economics, Univer-sity of Minnesota. I acknowledge the assistance of ROY Van Arsdall
in developing the outline for this paper and in supplying keyinformation. I absolve him, however, of any responsibility for its
final content.
2
Highlight Dimensions of Production and Consllmption
Production
Over the last decade or more livestock production in the U.S. has
generally leveled off while crop production has increased dramatically
(Figure 1). Preliminary estimates indicate that while crop production
had increased by 40 percent
production had increased by
rate of aggregate livestock
from its 1967 level by 1979, livestock
only seven percent. This slow growth in the
production results from a substantial realized
increase in production per breeding unit being offset by an absolute
decline in the number of breeding units (Figure 2). But, as we will discuss
later, there were big differences in the rates of change between livestock
product categories and even in their directions. The rapid increase in
crop production, particularly during the 1970’s, has generally been
attributed to a greatly expanded demand from the commercial export sector
particularly for foodgrains (mainly wheat), feedgrains (mainly corn) and
soybeans. And, there was no similar incentive to spur expanded food
animal production.
Production changes between 1960 and 1977 are shown in Table 1. Per-
centage changes in each product category will differ some depending on the
specific years which are being compared, but the major conclusions remain
about the same. Beef production increased dramatically over the 1960-1977
period largely as the result of a major increase in the national beef herd
up to 1975 and a shift to more feedlot finishing of cattle which increased
both the rates of gain and the marketing weights for cattle. The decline
in veal production is mainly the result of two factors: (1) a decline of
Figure 1
crop and Liw35tock Production
?“0of 1967140 I 1
130
~
120 1
)
110 ~I
100JJCrop production
\
....-!<..”ZX~,
1967 71 75 79
Figure 2
Liveskxk Production per !3rswNng Unit%01Iw140
130
120
110
100
90
I Lwestockprocju@ionparbreedingunit ~ I
r 7●J’..,,‘%*..‘-’’~>**’*~’’’’’’’’’’’&”*”””~’”●“’”**..*,
Ammalbreedingunits “’+’”
1%0 6.5 70 75 w-l
Source: 1979 Handbook of AgriculturalCharts. ESCS, USDA.
03u
-aor2
woGo
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o
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5
37 percent from 1960 to 1977 in the national dairy cow herd from which most
of the veal calves were produced historically and (2) a higher proportion
of dairy male calves are no longer vealed but are eventually diverted to
the feedlot for finishing.
Total pork production changed relatively little between 1960 and 1977
though the structure of the swine industry changed dramatically. And,
though the “hog cycle” diminished somewhat during the period its impact on
total production continued to exceed any secular changes in total pork
production.
Lamb and mutton production declined
and 1977. This major secular decline in
in the “Western ranch-type” component of
causes both internal and external to the
among others, high labor and land costs,
by more than half between 1960
the sheep industry, particularly
the industry, has several major
sheep subsector. They include
high losses to predators and
strong competition from the poultry! beef and pork subsectors.
Among the major food animal product subsectors, poultry meat (par-
titularly broilers) grew the most rapidly between 1960 and 1977. And,
this growth continues. Much increased production efficiency (particularly
in feed-meat conversion and labor use) along with specialization of
production and vertical integration of the poultry industry have accompanied
this rapid growth in the output of poultry meat. While total egg production
changed little from 1960 to 1977, integration and specialization of the egg
subsector contributed to the rapid disappearance of small producers.
Finally, though total milk production changed little from 1960 to 1977,
the secular decline in dairy cow and dairy producer numbers and the secular
increases in size of enterprise and degree of specialization continued. And,
6
major changes occurred in the mix of dairy products to which the milk was
converted for human consumption. Though milk production rose substantially
in response to much higher price supports for milk in 1976-77 there is
considerable evidence that total production has now levelled off again
and may or may not resume its decline of the late 1960’s and early 1970’s.
The major drop in dairy cow numbers citedearlier was certainly a major
contributor to the earlier decline in milk production and this drop in
cow numbers continues.
Consumptio&
That total supply equals total demand at an equilibrium price for
food animal products is a truism. It is, however, an oversimplification
of the real world of food animal agriculture. Not all food animal products
need be or are consumed in the same period in which they are-produced.
Moreover, domestic production can in some cases be augmented by imports from
foreign producers and some domestic production can be diverted to foreign
markets via exports (the latter via commercial sales, confessional sales or
gifts, or some combination). Thus, the set of identity equations which
balance product supply with demand in the short run include storage and
trade components. In addition, a variety of governmental and private
entities intervene in the market place for animal production on both
the supply and the demand side, particularly the latter. Despite these
complexities and others, however, the aggregate annual demand for and
consumption of domestically produced food animal products is mainly the
product of the annual per capita consumption rates of U.S. consumers X the
U.S. population.~’ And, since total population increases in the U.S. are
2/now occurring at a very slow rate,— it is mainly changes in per capita
consumption rates which induce changes in the long run production of food
animal products. Of course, prices for individual food animal products
(both absolute and relative to substitute foodproducts) are important
determinants of per capita demand as are consumer incomes, product
availabilities and consumer tastes and preferences. While not trying to
identify the reasons for changes in per capita consumption rates at this
juncture, it is instructive to see what has happened to them for the major
food animal product groups over the recent past.
Table 2 shows
product categories
figures were shown
In evaluating
per capita consumption rates for the same food animal
and the same time period for which aggregate production
in Table 1.
the changes in per capita consumption levels for the food
animal product categories shown in Table 2 it is of interest to note that
during the period 1960-77 the retail price index of all food increased by
118.4 percent. Corresponding increases were 46.6 percent for poultry, 47.4
percent for eggs, 96.7 percent for dairy products, 99.8 percent for meat and
196 percent for fish, a major substitute for red meat and poultry. Thus, in
l’This is so because most food animal products produced in the U.S. are nottraded extensively by the U.S. in world markets (exports and imports are onlya small percentage of domestic production). Moreover, both the high degree ofperishability and the high storage costs for meat and fluid milk make inter-temporal shifts in their supplies largely uneconomical. This latter phenomenonhas the further result of generating large swings in meat prices and thus con–tributes to the major cycles still present in pork and beef production.
“The civilian population of the U.S. (on which per capita consumption estimatesin this report are based) increased from178.1 million in 1960 to 214.7 millionin 1977 for an average annual increase of 1.21 percent. Future population in-
creases are generally projected to occur at an even slower rate.
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9
general terms, meat and dairy product prices increased at about double the
rate for poultry and eggs and at about half the rate for fish. Also, durin;;
the 1960-77 period the consumer price index (CPI) rose 104.6 percent. So,
using the CPI as a base measure of value during the 1960-77 period, the
real price of poultry and eggs at retail dropped substantially, the real
price of meat and dairy products dropped slightly and the real price of fish
almost doubled.
per capita consumption of beef
percent) from 1960 to 1977 while the
increased dramatically (about 45
real price of beef remained fairly
constant. And, though per capita consumption of beef (retail cut equivalent)
exceeded that for pork only slightly in 1960 , it exceeded it by more than 64
percent in 1977. Thus, among the red meat categories, beef has been the big
gainer in per capita consumption. This probably reflects a strong consumer
preference for beef along with a high producer capacity to provide the product
using new feedlot-type production technology. Though consumer preference for
veal may have declined during the 1960-77 period, the reduction in per capita
consumption of almost 40 percent from 1960 to 1977 was
“availability” phenomenon.
The slight decline (6 percent) in per capita pork
to 1977 is probably mainly the result of the increased
and poultry meat, the latter at much lower real prices
probably mainly an
consumption from 1960
availability of beef
than for pork. As
evidenced by the higher percentage of hog carcass weight going into “retail
cuts” in 1977 as compared to 1960, there was a continuation of the long term
shift of production from “lard type” to “lean meat” type hogs.
Per capita consumption of lanlband mutton declined to 1.5 pounds in 1977.
This makes that food animal category of only minor importance to most U.S.
consumers except as a “variety” or “specialty” food item.
10
The very major expansion in per capita consumption of chicken and turkey
meat between 1960 and 1977 suggests that per capita poultry meat consumption
will soon be exceeded only by that of beef. Effective quality control, wide-
spread availability and lower real prices than for other meats have all con-
tributed to the increased per capita consumption of poultry meats as have the
increased consumer concerns about animal fats generally and about cholesterol
particularly.
Per capita egg consumption increased to 277 eggs in 1978 from the 272 egg
level of 1977. This represents the first break in a long term decline in per
capita egg consumption and may reflect a rather long-term leveling off in per
capita consumption.
Per capita consumption of dairy products also appears to have leveled off
in the post-1975 period after a long period of decline. Changes in per capita
consumption levels for the past decade (1968-78) are shown in Figure 3 for
major dairy product categories. Clearly the strengthening influence in per
capita consumption of da%ry products has come from low fat fluid milk, cheese
and other low fat products. Per capita consumption of high fat products such
as butter, fluid cream and fluid whole milk continues to decline.
The decline in per capita consumption of butter is part of a broader
phenomenon relating to consumption of fats and oils. In 1960 per capita
consumption of fats and oils from animal sources totalled 19.9 pounds. It
declined by 43.7 percent o 11.4 pounds in 1977. Meanwhile, per capita
consumption of fats and oils from vegetable sources increased by 61.2 percent
from 28.6 pounds in 1960 to 46.1 pounds ,in 1977. Among food animal products,
per capita consumption of lard declined by almost 70 percent from 1960 to 1977
(from 7.6 to 2.3 pounds) and per capita consumption of butter dropped abollt43
percent (from 7.5 to 4.4 pounds) over the same period. Thus, fats and oil from
animal sources have fallen into disfavor with consumers in recent years and this
Figure 3
PercentLow.fat IIUkt milk.
l.-~l’lOtherchee~a I— ]~
Americar] cheese i ===D7ice roil!<~7
K!!-3 Fluid cream
24 Ice cream
-13 Sherb?rt
a
-18 Butter
-29 Fluid whole milk
-4-~~[—” Nonfatdrymilk
-53[~~ Evaporated anti condensed mi!k
Source: 1979 Handbook of AgriculturalCharts. ESCS, USDA.
12
phenomenon represents a very major shift in product demand which faces the
food animal industry in the future. It appears that many consumers now
rely on the food animal industry mainly as a source of highly palatsble
protein foods and not as a major source of fats and oils.
The Producer and Supply Side of Food Animal Agriculture
Several key dimensions of the livestock and poultry production sector
are of major interest from the standpoint of the structure and economics
of the sector. They include:
(1) the inventory of livestock and poultry numbers and changes over time
(2) the distribution of these numbers within production and management units
(3) the flow of inputs and products through the production system
(4) the technology used in the production process including some perspective
on production efficiency
(5) the flow of financial returns to those firms participating in the pro-
duction sector including profit levels and
(6] aggregate supply responses for major animal product groups.
As for the aggregate production and per capita consumption figures
reported earlier, our brief statistical depiction goes back only to about 1960.
Inventory of Livestock Numbers 1960-78
Table
January 1,
Because of
relatively
3 shows the number of food-animal related livestock on farms on
for the period 1960-78 and the percentage change over this period.
the short production cycle in poultry, annual inventories are
meaningless. For this reason also, we have depicted hog numbers
in terms of annual slaughter. While recognizing the need to be cognizant of
production cycles in beef and hogs, the data in Table 3 still show several
major changes over the decades of the 1960’s and 1970’s. The 20 percent plus
13
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growth in the national cattle herd was the result of an almost 48 percent
increase in beef numbers (70 percent at the cattle cycle pealcin 1975) and
a decline of almost .45 percent in dairy cow numbers. Sheep and lamb
numbers dropped by almost two-thirds and hog numbers mainly cycled over the
1960-78 period but also drifted to slightly lower levels. Rarely, if ever,
has the U.S. livestock industry realized changes of these magnitudes over a
period of less than 20 years.
Structure of the Production Sector
Despite dramatic changes in livestock numbers over the past two decades,
changes in the structure of the production sector have probably been even
more pervasive. But , structure differs greatly by category of food animals.
Beef: The U.S. beef industry is made up of several components of which the
two major ones are (1) cattle raising, centering on the production of calves
from beef cow breeding herds but with some mixing of yearlings and other animal
classes and (2) the feeding of cattle for slaughter. Though some beef calves
move directly from the beef cow herd to the feedlot, others move into
intermediate or final stages of grazing andlor limited grain feeding. This
occurs under a wide range of programs with respect to time of duration,
feeding ration and management systems. Cull cows, dairy steers, bulls and
other animals find their way to slaughter either with or without feeding in
drylot.
In 1959, almost 2.7 million U.S. farms reported cattle and calves. At
that time many cattle herds were a mixture of dairy and beef animals. In
1964, about 1.3 million farms reported beef cows with an average herd size
Of 25 COWS. And, by 1974 only slightly more than 1 million farms reported
beef cows with an average herd size of 40 cows. Also in 1974, as was true a
decade earlier, the mod.a.lsize (over 40 percent of all units) of beef cow
enterprises fell into the 20-99 cow range. Thus , though there has been some
decrease in the number of herds and some increase in size of herds, beef
cow-calf production operations remain the broadest based and least specialized
of all major food animal enterprises. And, though beef cow enterprises are
the major commercial enterprise on many farms and ranches, they are present
on many other farms as a claimant for residual pasture, roughage feeds and/
or family labor resources. Beef cow enterprises have disappeared from a
number of farms during the past two decades, particularly in cash crop
farming areas. But, they grew in size and number in other areas, particularly
in the South. In general, however, beef cow enterprises have difficulty in
competing for the direct use of highly productive cropland which has strong
cash crop or feed grain production alternatives.
Cattle feeding, somewhat in contrast to beef cow herds, has undergone
major structural change since 1960. Prior to that time small farmer-feeders
(feedlots with less than 1,000 head capacity) produced most of the fed beef.
Now more than one-half of the fed cattle marketed are fed in about 420 large
commercial feedlots and small farm-feeders account for less than one-third
of total fed cattle rnarketings. At the upper end of the size range 23 feedlot
firms of over 50 thousand head one-time capacity fed 14 percent of all cattle
fed in 1974. Most small farm-feeder operations are managed as family-scale
operations as is the case for most beef cow production enterprises. Large
volume, commercial feedlots, on the other hancl,exhibit a wide range of
organizational structures, including partnerships and corporations. And,
many (53 percent in 1974) of the fed cattle marketed from incorporated
16
feedlots with two thousand head or more capacity were “custom fed” under
a variety of contractual arrangements. As of this date the number of small
farm-feeders continues to decline (though.there were still some 130
thousand lots of one thousand head or less capacity in 1977) and large
commerical feedlots continue to increase in nUIII~Jer.In addition to cattle
feeding, many of the large commercial feedlots are vertically integrated
into one or more other functions including cattle raising, meat packing,
meat retailing and restaurant businesses.
2iQlE: Nearly all hogs were produced in small enterprises prior to 1960.
In 1959 almost 1.3 million farms (34.3 percent of all farms) reported
market sales of hogs and pigs with an average per farm sales volume of
about 64 head. And, even in 1964 only slightly more than 7 percent of
total hog sales came from farms selling one thousand or more per year.
By 1974 this percentage had increased to 25 and the number of farms
selling 200 or less hogs had dropped to about one-half of it’s 1964 level.
Large volume producers, those marketing 5 thousand head or more annuallys
account for a rapidly increasing share of total production. One estimate
records 1,340 such large volume operations marketing 13.7 million hogs in
the United States in 1978. This approaches one-sixth of national production
with about a 17 percent annual rate of growth ,in such large operations in
recent years. The rapid growth in large operations has resulted both from
the new entry of large operations and the rapid expansion of existing units.
About 80 percent of slaughter hog production now comes from complete hog
operations (farrow-to-finish) and 20 percent from split phase operations (pigs
produced on one farm and finished on another). Feeder pig production tends
to center in areas and on farms where feedgrains are in limited supply but
17
where adequate labor is available to operate this more labor intensive
enterprise. These feeder pigs are then sold to producers who have sur-
plus feed grain supplies b~ltwho lack labor and/or facilities for pig
production.
Sheep and Lambs: In 1959 about 340 thousand U.S. farms reported sheep or
lambs. And, they averaged just under 100 head per farm. By 1974 the per
farm average had climbed slightly to about 116 head, but only about 140
thousand farms (41 percent of the 1959 number) remained reporting sheep
or lambs. Some specialized sheep operations continue on the Western
range but sheep are a supplementary enterprise on many other farms. As
of 1975 about one-half (66,500) of the farms reporting sheep were in the
North Central States where flock size averaged only 28 head per farm.
Thus , the major trend in the structure of the sheep industry in the U.S.
is toward many fewer sheep enterprises without much increase in enterprise
size or degree of specialization.
E!A2Y: The number of U,S. farms with milk cows declined from over 1.8
million in 1959 to 380 thousand in 1978. And, these numbers compare with
about 4.6 million farms reporting milk cows in 1939. Among those farms
classified as commercial dairy farms the number totalled about 205
thousand units in 1979. Average herd size on commercial dairy farms was
53 cows in 1979, the product of a steady increase over several decades.
Most dairy operations remain of a family - or partnership-scale of
operation with most of the forages and at least some of the feedgrains
produced on the same farm. This situation differs, however, by region.
And, a number of larger-scale drylot operations, with herds of two
thousand and up to 10 thousand cows,have been established in
California, Arizona and Florida. Many of these large–scale
production units purchase all or most of their feed, both concentrates and
roughages, from other producers and concentrate their efforts on producing
milk. In contrast to the sheep and beef cow subsectors, few farms have
dairy as a supplementary enterprise. Usually it is found as one OE the
major enterprises and, most typically, it is the major livestock enterprise
on farms where it is present.
Poultry: Among the several food animal categories reported here, poultry
has undergone the greatest changes, structurally, in the past two decades.
In 1959 some 2.2 million farms (about 58 percent of all farms) had
chickens and almost 1.1 million produced eggs for sale. At that time
over 86 thousand farms reported turkeys with an average of 950 birds per
farm. Thus , these components of the poultry Industry were still mainly
organized as numerous, small-scale enterprises. Commercialization of the
broiler sector was, however, already underway by 1959 with some 42 thousand
plus farms producing an average of over 33,600 broilers per farm. This
per-farmoutput level was more than double that of 5 years earlier.
By 1974 commercialization had pretty well swept through the poultry
industry though the number of producers still continues to decline and
the size of poultry enterprises continues to increase. In 1974 only 5,167
farms with 20 thousand or more birds per farm had more than two-thirds of
all hens and pullets of laying age. 1,763 commercial turkey farms selling
16 thousand or more turkeys accounted for almost 92 percent of total output.
And, 16,534 farms selling 60 thousand or more broilers per farm accounted
for almost 92 percent of total output. Though a number of small “farm
flock” poultry enterprises Continue to exist, they are relatively unimportant
from the standpoint of total food production.
19
Structurally, today’s poultry and egg industries involve an extensive
network of linkages which have developed between production units and
input-supplying and marketing functions. Coordinating systems cover
virtually all commercial broiler production and four-fifths or more of
all egg and turkey production. In these systems, much production is under
contract to marketing firms or carried out as only one phase within
vertically integrated firms. A highly integrated firm can involve all
or most of the following: breeding flocks, hatchery, feed mill, production
units, assembly
plants, further
centers.
of live birds or eggs, poultry slaughtering or packing
processing units, delivery vehicles, and distributing
Production Technology and Efficiency
In contrast to an earlier era when food animal production drew mainly
on land and labor inputs, some subsectors now resemble a value-added
industrial-type industry where farmers or feedlot firms purchase most inputs,
use mainly borrowed capital (or in some cases corporate-type equity capital)
and manage these resources to turn out a marlcetable product. This is
probably most characteristic of”the poultry subsector and some specialized
firms in cattle and hog feeding and in large-scale drylot dairy production.
It is probably least characteristic of the beef cow and sheep subsectors,
family-scale dairying and some hog operations where land and labor inputs ‘
still figure heavily in the production process.
Economic pressures for using high levels of production technology and
for maximizing production efficiencies are probably greatest in those
subsectors of food animal agriculture which are operated on a large scale
with mainly purchased inputs. And, they are least intense where the
production enterprise uses mainly residual-type resources with low
20
opportunity costs. But , as the prior information on reduction in producer
numbers and the increase in size of enterprises indicates, most food animal
production in all categories now comes from commercial producers. As a
group they are highly mechanized and use research derived technology and
managerial practices in breeding, feeding, housing, health management,
product quality control, input buying, product selling, financial management,
and in the coordination of
Current pressures for
the competition from other
these several dimensions of the production process.
increased production efficiency come not only from
crop and livestock producers and from substitute
products but also from inflation induced budget constraints on consumers and
fromthe increased demand for production resources (including land, capital
and labor) in nonfarm uses.
No single measure or even
efficiency describe adequately
several measures of technology or production
the current status of the U.S. food animal
industry. This is true whether one wishes to compare current overall
efficiency with that for some historical period or, as is of more interest
here, to assess the potential for future improvements. Clearly, the results
of past research and technology have been multifaceted. Some have increased
output per unit of land, labor, feed or animal. Others have had the effect
of eliminating onerous labor tasks. Still others have had their impact via
improving product quality. Most have substitutedcapital for labor in the
production process. And, almost all new technology which has been adopted
by producers had the potential for improving producer profits, at
least for the early adopters. Clearly, from the producer’s viewpoint the
major driving forces for adopting new technology have been the dual ones of
(1) reducing per unit production costs and (2) increasing total output (and
21
thus generating additional income). And, the new technology which has
been adopted most rapidly and most broadly has permitted both to occur
simultaneously as has been the case in the poultry subsector, in large
cattle feedlot technology and in commercial hog production. Table 4
exemplifies the type of gains made in feed and labor efficiency in the
poultry industry from 1955-59 to 1974-77. These gains were supported
by the development of successful methods for management of health
problems (particularly via feed medication) and improved housing and
equipment. And, they reflect improvements in rate of lay,
which are the product of a broad range of improvements all
breeding to management. Though all food animal categories
for example,
the way from
have realized
some
they
gains in labor
have generally
and feed efficiency over the past two decades or more,
occurred at a slower rate than for poultry.
Economics of Size and Specialization
One of the mechanisms by which gains in production efficiency have
been realized in food animal agriculture is that of production special-
ization.
when they
most two~
Producers have been able to obtain higher production efficiencies
have concentrated their management on one, or generally on at
food animal enterprises per farm. And, they have proceeded to
specialize at a rapid pace. Since WW II several reasons explain the
efficiency gains realized via increased size and specialization. First ,
most new technology, whether a labor efficient and automated milking
parlor, a labor efficient slatted floor hog house with an automated manure
disposal system or an automated cattle feedlot complete with feed grinding
and mixing equipment, rec[uiresa fairly large enterprise in order to exploit
fully its capacity and thus its per unit efficiency potential. Moreover,
these types of per unit cost efficiencies carry over, in at least some
22
Table 4Selected Efficiency Changes in the U.S. Poultry Industry,
1955-59 and 1974-77
Efficiency Percentmeasure 1955-59 1974-77 change
Feed per dozeneggs 5.4 4.3 -20.4
Feed per poundlive broilers 2.7 2.1 -22.2
Feed per poundlive turkeys 4.2 3.1 -26.2
Production Efficiencyper hour of labor* 40.4 178.0 +340
*1967 = 100.
Source: ESCS, USDA
23
degree, to such managerial practices as using the futures markets to
hedge feed and feeder animal purchases against future product sales
thereby improving marketing performance. A second set of reasons for
the growth in size of food animal enterprises has been pecuniary in
nature. Producers who purchase inputs in large quantities can often
obtain discounts in per unit prices. Similarly, they are often able
to bargain for price premiums on
scale, specialized producers are
large-volume product sales. Also, large-
more likely to take advantage of special
tax provisions such as investment credits and fast tax write-offs of
investments in machinery, buildings, equipment, etc., thus reducing their
real costs and maximizing this type of pecuniary benefit. Third, the
complexity of modern day food animal agriculture requires producers to
devote a considerable amount of time and energy (and in some cases to
incur considerable cash costs) in order to gather information (on
nutrition, breeding, waste management, disease control, finance, marketing,
etc.) and to evaluate this information prior to integrating it into their
production system(s). Once acquired, the cost per unit of production of
this information can be reduced by spreading it over a larger number of
product units.
No simple measurement device and no adequate data set exist for
measuring the economics of size for all food animal enterprises. But two
types of evidence can be brought to bear on the topic. First, some good
studies do exist which measure size-cost relationships for selected food
animal enterprises. Second, one can draw on “survivorship” data to assess
the future economic viability of different sizes of enterprises. For example,
if enterprises of a certain size have declined in number over time, it is
unlikely that they are of an adequate size to remain competitive in the long
24
run. If, on the other hand, they are increasing in number, and if they
represent an increasing prc;!ortion of total
of a size that will be competitive for some
major changes in production technology. We
production, they are probably
time into the future, barring
turn now to a brief summary
of size economics for major food animal categories.
Beef: More than one-half of all feed cattle marketed are now fed in 422
feedlots each marketing more than 30 thousand cattle. This size of feedlot
is growing in number and will probably continue to grow both in number and
in relative importance. But, numerous smaller feedlots now exist and
will continue in the future particularly when farmer-feeders have home
grown feed and family labor to service the cattle feeding enterprise, When
all production inputs are competitively priced, some per unit cost economies
probably exist up to the 30 thousand head size of feedlot and even beyond
to 40 to 50 thousand head. Economies of size beyond 30 thousand head
capacity are, however, probably mainly the result of vertical linkages
which result in high rates of feedlot utilization and/or more effective
marketing procedures.
Cattle raising (particularly beef cow herds) is so broad based and so
diverse as to almost defy analysis. Clearly, however, the major growth is
occurring in herds with 100 cows or more and herds with less than 20 cows
are rapidly declining in number. Available evidence suggests that per unit
costs for buildings and facilities, machinery and equipment, and perhaps
breeding stock investments, decline up to herd sizes of one thousand cows
buy may increase for herds beyond this size. Thus, future research, in order
to be most applicable, should probably focus on an enterprise size of 100
cows or more but probably not on the very large-scale operations of several
thousand head. And, it should probably be assumed that many beef cow enter-
prises will continue to be operated by producers wl~ohave other major farm
25
enterprises and/or off-farm employment. Thus , the future trend to larger
enterprises and more specialization in beef cow-calf production may be a
slow one.
a: From a survivorship perspective, hog enterprises marketing less than
200 head of hogs are rapidly disappearing. Rapid growth is occurring in the
number of enterprises which market one thousand hogs or more annually. In
the production of market hogs (complete farrow-to-finish and feeder pig
finishing operations) costs per hundredweight of hogs produced probably
decline up to a size of 5 thousand head or more though most of the cost
economies appear to occur by a size of 1,600 head marketed. Feeder pig
enterprises are diverse and variable but some cost economies probably
continue well beyond an enterprise size of one thousand head produced
annually. In production of both feeder pigs and market hogs, the major
size economies in production costs are in labor, management and capital.
costs . Feed requirements per unit of output change very little as the
size of operation is increased beyond some minimal level.
%: Dairy farms with less than 30 COGJS have declined in number rapidly
and the largest absolute gain in numbers (1950-74) has come in the 50-99
cow size range. Percentage-wise, however, farms with more than 100 cows
grew the most
26 percent of
present up to
rapidly in number during this period and by 1974 they had
all milk cows. Significant per unit cost economies are probably
60-70 cows or more on family-scale dairy farms with on-farm
forage production and up to a much larger size range (several thousand COIJS)
in the specialized drylot dairies of Arizona, California and Florida. Since
dairy production is still a labor intensive enterprise, the major source of
26
cost economies
technology for
Poultry: On a
tends to be in the substitution of capital intensive
labor.
survivorship basis only those prodllction units with more
20 thousand laying hens, 60 thousand or more broilers and 60 thousand Oi
than
more turkeys sold annually are increasing both in number and in percent of
total production. Laying flocks of 3,200 to 20 thousand hens are still
important, however, as are turkey producers marketing from 16 thousand to
60 thousand turlceys. Per unit production cost savings associated with feed
and water automation, feed milling, materials handling, etc. , probably extend
to upwards of 50 thousand broilers sold per year, to 20 thousand or more
turkeys and to from 10 thousand to 20 thousand layers. Beyond these enter-
prise sizes, those economies associated with input acquisition (poults, feed,
medication and management assistance) and with product marketing via vertical
integration become the dominant factors affecting size economies.
Income, Costs and Supply Response
It is extremely difficult to unravel the complex interrelationships
which exist between the supply response of producers and their cost and
profit levels. It is even difficult to determine the relationships between
annual enterprise profits and after tax returns to farmers and other inves-
tors in food animal agriculture. There is, however, a good deal of evidence
to suggest that farmers and other investors are willing to accept low
current (operating) returns on some investments (such as land, breeding
livestock, etc.) in order to realize long term capital gains which are
taxed at a lower effective rate. Certain other food animal enterprises,
on the other hand, are very sensitive to short-term price and profit
levels. Poultry and feeder pig finishing enterprises are good examples
27
of the latter. The brief discussion which
provide some insight into the income, cost
faced by many producers.
Beef: Costs and returns for beef cow-calf
follows is intended only to
and supply response situation
producers in recent years
indicate that cash income returns have typically covered clirectenterprise
costs and have provided some limited returns to labor. But , they have not
usually covered ownership costs for machinery, buildings, breeding herds
and land. With large beef supplies, spiraling land costs and large
inflation induced increases in other production inputs continuing for
several years, profit levels in cattle raising were driven to negative
levels unattractive to
farm investors seeking
phenomenon resulted in
both (1) operating farmers and ranchers and (2) non
tax sheltered investment opportunities. This
the “liquidation phase” of the beef cycle beginning
.in 1976. There is
beef cow heard had
would not generate
widespread agreement that the size of the national
grown to a size in 1975 (45.4 million head) which
profits adequate for its sustainment. And, if the
national beef cow herd is to return to its 1975 level or a higher beef
prices, reduced production costs, or both. As reduced production of
feeder cattle from the smaller beef cow heard is realized, calf prices
will rise and the cattle raising subsector will again enter an expansion
phase of the beef cycle. But, because of higher production costs, the
expansion inducement price level of the future will be much higher than
in the past. The current cattle raising liquidation phase of the cattle
cycle has been a broad based one as will probably be true for the
next expansion phase of the beef cycle as well.
Total
classes of
previous 3
at sharply
28
fed-beef production costs exceeded returns in 1977 for all
feedlot businesses. However, losses were lower than in the
years when many feedlots were left empty and others operated
reduced capacity. Rapid increases in production costs ac–
companied by low fed-beef prices left the cattle-feeding industry in a
financial crisis during 1974-76, A positive return above total costs
was finally realized in 1978 by both commercial and farm feedlots. But ,
profit margins continue at precariously narrow levels. Experience of
the 1970’s has shown the large scale commercial cattle feedlots to be
more responsive to cost and price levels (and therefore profits) 3’ than
many farmer-feeders who tend to continue feeding cattle in the face of
highly unprofitable circumstances.
In the expansion phase of the cattle cycle, supply response from the
cattle feeding subsector is, of course, dependent on the cattle raising
subsector for an expanded supply of feeder cattle. Though cattle can be
profitably fed to slightly heavier weights when beef prices are high, this
source of supply response has only very limited potential.
Q3.$1: A study of hog production costs in 1976 indicates that new entrants
into hog production incurred total costs averaging almost $50 per hundred-
weight for all sizes of farrow-to-finish enterprises. These costs ranged
from almost $60 per hundredweight for very small enterprises (marketing
of 40 head per year) down to almost $42 for enterprises with annual
marketing of 5 thousand head or more. Production costs ran much higher
for feeder pig production ($85 to $95 per hundredweight). Thus, though the
“For example, U.S. farmers reduced the quantities of corn and sorghum fedto livestock and poultry by 25 percent between 1973 and 1974 in responseto the rapid rise in grain prices which occurred at that time. Much Ofthis adjustment was made by the operators of large commercial beef feedlots.
29
larger, modernized hog producers have realized reasonable profits in
recent years, smaller, less efficient producers have stayed in production
only by absorbing some part of ownership costs on facilities and buildings
and, in some cases, accepting relatively low labor returns.
On the supply response side, adjustment patterns and economic factors
responsible for them have changed dramatically since the 1950’s. The
expansion and contraction of production by farmers producing hogs has
focused increasingly on two groups of producers. One group, including
both existing producers and new entrants, has specialized in hog production,
enlarging enterprises by increments of substantial size each time favorable
profit conditions permitted. The other group, comprised largely of farmers
with marginal hog enterprises, older farmers choosing to reduce their farming
activities, and farmers who have chosen expansion in other enterprises,
maintains hog production while returns are favorable, but ceases hog production
permanently when returns become unfavorable. This suggests that the production
troughs of future hog cycles probably will not drop as low as those in the
past as the more specialized producers stay in production year-after-year. As
long as producers can at lenst recover direct (variable) costs and any part of
their fixed costs, it will pay them to continue production. Also , the new
labor efficient technology utilized in modernized hog farming is expensive
and takes time to construct. This may explain why apparently profitable
production conditions in recent years have not resulted in expandecl output
as quickly as in years past. Moreover, with investment costs now representing
a much higher proportion of total production costs than formerly, some
measure of the estimated return on investment cost will probably be a better
indicator of future supply response for hogs than the hog–corn ratio which
predicted supply response so well in earlier periods.
30
As we suggested earlier for beef, because of increased production
costs the next expansion phase of the hog cycle will require a higher
triggering price level than in the past. Whereas a hog/corn price ratio
of 13:1 was considered breakeven in 1950 (and above which production
would be encouraged), the current hog/corn price ratio required to
encourage expansion is about 24:1.
!E.QY: Among the major food animal product categories, dairy, along with
beef cow-calf production, is probably least responsive to short term cost-
price (profit) fluctuations. Dairy facilities are expensive to construct
and the enterprise is heavily dependent on large roughage and labor inputs.
Thus, it is difficult for producers to adjust production levels greatly in
response to short term profit levels and it is virtually impossible to be in
and out of dairy production from one year to the next. Major increases in
the government price support levels for milk in 1976-77 assured most dairy
producers of good enterprise profits particularly with feed grains prices
down from their high prices of 1973-75. As a result dairy production ex-
panded. But, inflation has pushed dairy production costs to higher and
higher levels, and with the less efficient producers, at least, facing less
attractive profit levels, milk production has declined”some recently. More
than for any other food animal production subsector, future dairy production
levels will probably be dependent on the price support policies of the
federal government. These policies, in turn will probably center on adjust-
ing support prices upward but only at a rate which will cover inflationary
costs to producers and will not result in an excessive build up in government
stoclcsoj dairy products. Thus, though government policies will likely
stabilizq future prices and incomes for dairy producers, these policies will
31
likely be conditioned heavily by the effective demand by consumers for
dairy products and will not provide incentives for milk supply expansion
in the near future.
Sheep and Lambs: Sheep producers have suffered from a broad range of
economic problems including much higher land and labor costs and other
labor problems, inflation induced increases in other input costs, heavy
losses from predators, increased consumer demand for beef and poultry meats
and others. Synthetic fibers, cotton and foreign produced wool have applied
similar economic pressures on U.S. produced wool, the joint product produced
along with lamb and mutton. As a result of the relatively low lamb and wool
prices existing up to the mid-1970’s many producers were unable to cover
even their d$rect operational costs. And, as a result they quit farming or
shifted to beef cattle production. The secular rate of decline in the
sheep-lamb subsector has lessened somewhat in recent years. This reduced
rate of decline is expected to continue into the future but there is little
evidence to suggest that it will be reversed as some dissatisfied producers
continue to shift out of the sheep enterprise.
Poultry: Profit levels have generally been attractive enough to encourage
production increases by the larger, more efficient poultry producers. As
is the case for hogs, however, the small, less efficient producers have
ceased operations at a rapid rate. Feed is the largest and one of the
most critical inputs in poultry and egg production, accounting for two-
thirds to three-fourths of the cost per dozen eggs or per pound of live
broiler turkey. Bird costs, (hen depreciation or chick and poult costs)
are the second largest cost item. Labor costs and overhead cost (buildings,
32
equipment, etc.) are abaut equal in importance; the former have been
declining in importance and the latter are tending to increase. Energy
costs are of minor importance in relation to total costs, but are now
more critical because of the supply/price situation for that input.
Poultry and egg producers can adjust output during the year through
the number of chicks or poults started, changing the frequency of batches
raised, adjusting market weights, or culling or recycling layers. Ultimate
limits to increases exist, however, in terms of housing capacity and
chicleor poult supplies from breeding flocks. Year-to-year production
responses are affected by past net returns, but there often are several-
year lags before large responses, occur. It seems likely that, in direct
contrast to the sheep-lamb subsector, the poultry industry, particularly
the production of poultry meat, faces an expanding future. And, most of
the inputs and products of the poultry subsector will continue to flow
through a highly integrated production-marketing system.
‘LheConsumer and Demand Side of Food Animal Agriculture
Effective demand for U.S. produced animal food products has, in the
past, been principally for domestic utilization. Table 5 summarizes the ag-
gregate domestic disappearance, exports and imports for major food animal
product groups from 1960-77. Only for pork and poultry meat did exports
exceed 2 percent of domestic use in 1977. And, chicken meat exports, while
greater. than for any other animal product category, were only 5 percent of
domestic use. U.S. produced supplies of beef, pork anddairy products were
all augmented by significant quantities of imports. But, only for beef,
pork, lamb and mutton did imports exceed 2 percent of domestic use in 1977.
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34
Domestic Demand
Historically, the demand by U.S. consumers for food animal products
has been principally a function of consumer disposable income, prices of
individual food animal products and their close substitutes, and the
tastes and eating habits of consumers. But, this situation has grown much
more complex in recent years. Consumers now eat more of their meals away
from home than formerly and their consumption is conditioned by a broad
set of factors such as self imposed dietary constraints, convenience of
food preparation and food safety considerations in addition to the his-
torically important income, price and habit factors. And, the self imposed
diet constraints are the product of health concerns, concerns about the
grain requirements to feed the world population, changing population
structure, etc. Many of these variables are undergoing change currently
and are not well quantified. Their identification and qualification are,
in fact, among the topics needing effective research attention. It is
probably the case, however, that consumer incomes and product prices
(including the prices of close substitute foods) are still the most im-
portant factors affecting aggregate demand for food animal products. These
are followed in importance by health related dietary considerations, changes
in proportion and types of meals eaten away from home and population changes.
In assessing the future demand for meats (beef, pork and poultry) Van Arsdall
4/and Associates — make the following appraisal, “Future demand for these meats
will depend on: population growth, growth in real discretionary income, pro-
portion of meals eaten away from home, more fast food outlets, and animal
gRoy van ~rsdall , Ronald Gustafson and Harold Jones, “The Future for
Livestock, Poultry Production”. Feedstuffs, June 12, 1978.
35
consumer resistance to fats and increasing proportions of young and old
in the population. Only population growth is expected to favor pork.
Beef and broilers are preferred meats: both will benefit from all six
factors.” In the discussion which follows we do not attempt to estimate
future demand for food animal products but rather to describe briefly
the major factors affecting demand so that high priority research issues
can be better identified.
Effect of Price Changes on Demand: The demand for food, including food
animal products, is not as responsive to price change as is the demand
for many non-food items. Thus, for food animal products as a group, a one
percent change in price will result in a less than one percent change in the
quantity of food animal products purchased
demand for food animal products as a group
Table 6 shows estimated price elasticities
and consumed. As a result,
is said to be price inelastic.
and cross-price elasticities
of demand for major food animal product categories, fish and “other food”.
The upper left to lower right diagonal of this matrix of elasticities
shows the estimated change in the quantity of a commodity purchased as the
result of a one percei~t change in the price of that commodity.
example, if red meat prices increase by 1 percent, other things
constant, consumption is estimated to decline by .621 percent.
For
remaining
These elasticities show that both red meats and poultry have greater
price elasticities (consumption responses to price changes) than do eggs,
dairy products, fish and other foods. Thus , if production costs (and
subsequently real product prices) can be reduced,
greater market response for red meats and poultry
one can probably expect
than for other major food
36
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37
animal products. Though not shown in Table 6, .aprice elasticity matrix was
estimated with further breakdowns in the classification of meats into beef,
pork, chicken and turkey. This matrix was inverted to derive a “price
flexibility” matrix for these food animal products, The resulting price
flexibilities indicate the following: (1) a change in pork consumption will
have a smaller effect on beef prices than will the converse, (2) broiler
prices are highly responsive to changes in pork consumption (much more so
than for changes in beef consumption) and (3) beef prices are not very
responsive to changes in poultry consumption, but pork prices are. These
relationships as well as those identified by the price elasticities and
cross elasticities of demand can help to show the expected impacts of
future research on product prices, on quantities demanded, and.consequently,
on producers’ profits. But, one must bear in mind that these elasticities
are subject to possible change. And, as national averages they mask a
wide range of variation in demand response based on the age, income>
family structure, life styles, etc., of consumers, and on the forms in
which the various foods are consumed.
Effect of Income Changes on Demand: The effects of changes in consumer
incomes on the demand for food animal products are not easily quantified.
And, they may also be undergoing significant changes at the current time.
Nonetheless, income elasticity estimates are presented in Table 7 for
major food animal products. These estimates are derived from cross
sectional data, for 1965. Though they should be applied with caution,
they do illustrate some key relationships worthv of note. For example,
as consumers’ incomes rise, other things remaining constant, consumers
increase their purchases of beef, turkey, lamb and mutton significantly.
38
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39
And, they increase their proportionate expenditures for fed beef, a
preferred product, very substantially (see footnote, Table 7).
Though not shown in Table 7, the same Household Food Consumption Survey
data show that individual consumers in the higher income brackets of
households ($20,000 or more) consumed about 8.5 pounds of lamb
annually at the time of the suney while those in the lower income
brackets (less than $7,000) consumed less than 3 pounds per person. On
the other hand, as incomes rise, consumers decrease slightly their ex-
penditures for chicken meat and eggs and hold expenditures for pork about
constant. Indications are also that consumers increase their expenditures
for most low fat dairy products and cheese as their incomes rise. But,
since consumer demand for fats and oils has underSone a major structural
decline in recent years, future projections of income elasticities for these
products is rather hazardous. Finally, if consumers face even more stringent
budget constraints in the future as a result of continuing inflationary
impacts on their real incomes, they may respond by adjusting downward their
purchases of food animal products, particularly meat. And, they may
exhibit revived interest in purchasing a broad range of substitute foods
including those from soybean, cereal grain and synthetic sources.
Actually, of course, most food purchases are made by individual
households faced with a unique set of budget circumstances. And, these
individual households (and other consumer decision units) can be classified
in numerous ways. Table 8 presents selected population and food expenditure
data for different income groups for
this table illustrates the declining
households for food at higher income
1973-74. Among other relationships,
portion of income which is spent by
levels. Thus, not only do food animal
40
Table 8Relationship Between Income and Expenditures
For Food, 1973-74*
Income Total Total reported Total food Food asclass population income expenditures percent of
income
Dollars Percent
Under5,000 18.19 6.47 15.39 38.88
5,000-8,000 14.14 9.31 13.09 23.01
t3,000-12,000 21.17 17.79 20.35 18.72
12,000-15,000 14.47 14.65 14.08 15.75
15,000-20,000 16.07 19.86 17.29 14.26
Over20,000 15.96 31.92 19.80 10.17
*Data from 1973-74 Consumer Expenditure Survey, Bureau of Labor Statistics.
Source: National Food Review, ESCS, June, 1978.
41
products compete with other food products for the consumer dollar, but,
because of the income inelastic demand for food, they compete for a much
smaller proportion of consumer income as income levels increase. In sum,
the relationships between income and demand for food animal products are
complex. In the aggregate and for most individual products demand is
income elastic. Yet, gains in the real incomes of consumers are
probably critical if per capita demand for food animal products is to
rise much in the future. With higher consumer incomes, fed beef and
turkey appear to have the strongest potential as recipients for increased
consumer expenditures.
Food Consumed Away-From-Home: The increased incidence of away-from-home
consumption of food in recent years is the result of several interacting
forces. Higher consumer incomes, the rapid emergence of fast-food eating
establishments, the increased number of women employed outside of the
home and other dimensions of changing life styles are only some of the
factors involved. Each of the above factors could be and has been the
topic of major published reports. But, we have space to touch only
briefly on these topics. Table 9 shows that, about one dollar in four
of the overall expenditures of a sample of U.S. households for food was
away-from-home in Spring, 1977. Nationally, however, expenditures for
food away-from-home were about one-third of all food expenditures in
1978, up from one-fourth in 1960. And, this percentage is expected to
climb even further. As might be expected, both income and family size,
and even location of residence, have important effects on the incidence
of away-from-home food purchases as does age (Table 10). Lower incomes
and larger families both constrain the incidence of away-from-home food
consumption as does increased age at least in the post-55 range.
42
Table 9Per Capita Value of Food Used in a Week, by Households,
Spring 1977*
At Away fromTotal home home
Dollars
All households 19.91 15.17 4.74
Region:Northeast 22.56 16.77 5.79North Central 19.19 14.61 4.58South 18.40 14.46 3.94West 19.99 15.08 4.91
Urbanization:Central city 20.69 15.75 4.94Suburban 20.91 15.54 5.38Nonmetropolitan 18.17 14.32 3.84
Before Tax Income (1976):Under $5,000 17.51
$5,000-$9,99914.99 2.52
17.26 14.20 3.06$10,000-$14,999 18.50 14.15 4.35
“ $15,000-$19,999 19.99 14.99 4.99$20,000 and over 23.19 16.36 6.83
People living in household:One 26.34 20.81 5.53‘If.rO 24.28 18.36 5.93Three 20.80 15.41 5.39Four 18.88 14.22 4.66Five 18.07 13.80 4.27Six or more 15.52 12.36 3.17
*Data from USDA 1977-78 Nationwide Consumption Survey.
Source: National Food Review, ESCS, Summer, 1979.
43
Table 10Relationship Between Age, Income and
Expenditures for Food
Per Capita Percent of Income Spent onAge Median Income Food at home Food away from Total food
home
Under 25 2970 11.2 6.3 17.5
25-34 3210 11.5 4.9 16.4
35-44 2850 13.9 5.0 18.9
45-54 3600 12.6 4.9 17.5
55-64 4080 12.4 4.1 16.5
Over 65 2950 17.4 4.1 21.5
All 3260 13.0 4.8 17.7
Source: 1972-1974 Consumer Expenditures Survey, Bureau of Labor Statistics.
Diet and Health Concerns: Health concerns have led to increased per
capita consumption of low fat and so called “natural” foods both in the
U.S. and in other developed countries. We mentioned earlier the rapid
decline in demand for fats from animal sources. And, though sales of
health foods currently account for only about one percent of the national
grocery bill, an estimated 350-400 health food manufacturers now dis-
tribute their products nationally and about that many more locally.
This represents a phenomenal percentage growth since 1960.
A somewhat different dimension of food health concerns is that
identified by the Delaney clause enacted in 1958 as part of the Food
Additives Amendment to the Federal Food, Drug and Cosmetics Act. This
Amendment states that, “NO additive shall be deemed to be safe if it is
found to induce cancer when ingested by man or animal, or is found,
after tests which are appropriate for the evaluation of the safety of
food additives, to induce cancer in man or animal”. Of particular concern
to the food animal industry is the future use of nitrites as a preservative
for use in cured meats such as ham and bacon. Eitrites can combine with
substances called amines that form nitrosamines and these have been linked
to lymphatic cancer in rats. The nitrosamines issue and a number of other
food animal product-health related issues have been addressed extensively
5/in the literature. — But, their impact on current and future demand for
food animal products is still uficlearas of this date and needs effective
research attention.
AISee particularly the report by CAST pending publication and entitled,
“Food from Animals” and a number of reports centering on individual food–health issues.
45
Other Factors Affecting Demand: A complex set of additional factors
affect the domestic demand for food animal products. These include
changing life styles, changing population structure and such factors
as concerns about, “the need to use grains to feed the world’s human
population instead of animals”. And, these and other factors interact
with the effects of prices, incomes and location of food consumption.
One recent food growth area has been that of household gardens. The
value of fruits and vegetables grown in such gardens was estimated at
$14 billion in 1977. The significant concentration of this garden
food production among low income groups suggests that it is partially
an “income problem induced” phenomenon. Yet, some garden production
is clearly related to life style preferences and to the desire for
natural foods. And, its general impact on the demand for food animal
products is a negative one.
The impact of changing population structure on food
demand is complex. But, neither the “very young” nor the “very old”
in the population are heavier consumers of meat and-other food animal
products though young children are important consumers of milk and ice
cream. Clearly, the effects of changing population structure on the
demand for food animal products needs creative research attention.
In summary, changing life styles can be expected to have a diverse
effect on the demand for food animal products. Some consumers will.
increase their demand for convenience foods for home use and will resort
to more away-from-home food consumption. Others will increase their
demand for natural foods, including those produced commercially and
from household gardens. The latter will probably have some net negative
[{6
effect on the demand for food animal products. But , food animal products
may gain as the demand for food convenience increases both at home and via
fast–food outlets.
Export Demand
As reported earlier (Table 5) export markets
been of major consequence to the U.S. food animal
have not
industry in the past.
And, the bigger concern by the U.S. food animal industry has been to
curtail the level of imports to the U.S. when feasible, most food
importing countries prefer to import grains rather than the more
expensive animal products. Thus, mainly food grains (principally wheat
and rice) are imported for direct human consumption. And, where income
levels permit, food grain imports are augmented by the import of feed
grains to support the internal livestock production sector.
The U.S. food animal industry can expect to continue its modest
exports of live animals for breeding purposes. In addition, exports of
some grain fed meats are likely to those Countries (mainly Japan and
Western Europe) where higher consumer incomes permit their purchase.
A brief evaluation of effective export demand for major fooclanimal
products follows. Numerous available publications report the evaluation
of export demand in more detail.
Dairy Products: Probably very little potential for significant expansion
in exports exists. Surplus dairy supplies in western Europe and a low cost
dairy industry in New Zealand effectively preclude increased effective
demand for U.S. exports. In addition, U.S. dairy producers need high
product prices in order to realize profits from exports.
- 47
Poultry and Eggs:
exists except for
Probably very little poten~ial for export expansion
poultry meats. In the long run, if poultry meat
imports increase greatly in a country, that country is likely to resort
to developing its own poultry industry further even if it needs to
import feed grains and poultry production technology in order to do so.
Red Meat: Red meat exports have been drifting upward in recent years even
though total exports remain relatively small. In 1978, exports of steaks,
roastsj etc., totalled about 450 million pounds or about one percent of
U.S. production. In addition, exports of variety meats (kidneys, liver,
6/tripe, etc.) totalled about 410 million pounds.— In the case of variety
meats, these.p~.mlucts are regarded as a cleilicac.yin many foreign countries
but are not a preferred food item among U.S. consumers. It appears likely
that exports of U.S. grain fed beef will expand somewhat in the near future
as consumer incomes rise overseas. The extent of such increase will prob-
ably depend heavily on the import policies of Japan and Western European
countries and on the extent to which a fed beef industry develops in Western
Europe. There appears to be little likelihood of expansion in effective
export demand for nongrain fed beef from the U.S. And, any growth in pork
exports will almost certainly be very modest. Overall, it appears that, at
least for the foreseeable future, most of the effective denand for U.S.
produced food animal products will continue to be from domestic sources al-
though some effective research on the foreign market potential for grain
fed beef and poultry meats appears well justified.
—.
&/In that same.year the U.S. imported about 2.86 billion pounds of meat,
mostly for stews, sausages ar,clhamburger.
48
Marketing and Distribution and Food Animal ‘Froducrs—. —
Marketing and distribution of food animal products ~.nthe U.S. is
accomplished via a broad set of activities and services performed by a
combination of private firms and governmental agencies. In order to
split out the costs of marketing and distributing farm produced foods,
consumer expenditures for farm foods are sometimes broken down into
their “farm value” and their “marketing bill” components. The marketing
bill is then further divisible into subcomponents for transportation,
processing, wholesaling, retailing and food service.
The above categorization of marketing and distribution within the
“marketing bill” excludes from direct scrutiny, however, that set of
activities which results in the change in ownership from producers to
next owners (principally processors) of food animals and food animal
products. Thus, we give brief attention next to the “producer sales”
function of marketing before considering the marketing bill components
in more detail.
Producer Markets:
The institutional mechanisms for transferring product ownership from
producers vary greatly for the several major food animal products. And,
where complete or partial integration exists between production and market-
ing, neat transfer of ownership from producers may not even occur at this
stage. In general, two major concerns exist with respect to producer
markets for livestock and livestock products. These are (1) that they be
cost efficient and (2) that they accurately reflect product value. The
latter phenomenon is sometimes expressed as a cencern about “fair and
accurate” price discovery.
49
As mentioned earlier, most chickens, turkeys and eggs move through a
vertically coordinated production and marketing system. And, though both
spot and futures public market price quotations exist for broilers and eggs,
spot markets are based on a fairly thin volume of sales transactions. In-
creasingly, dairy producers market their milk through a system of producer
owned cooperatives which also take on the processing function. A number of
private firms, particularly those engaged in cheese manufacturing, still
provide an operational market for milk in some areas, often under contract
with producers. By far the broadest set of public market institutions
exists for cattle, hogs and sheep. Thus , it is to the market place for these
animals that we now turn in more detail.
Figure 4 shows a schematic diagram of market channels for livestock.
Concurrent with the operation of this “physical transaction” market is the
operation of active futures markets in feeder cattle, marlcet cattle, hogs
and pork bellies. With the advent of large-size cattle and hog feeding
enterprises, and with extensive decentralization of packing plants into
major production areas, a higher proportion of slaughter ready animals
are now sold via direct (on farm) buying by packers. Terminal and auction
markets still perform an important role in the selling of market livestock
as do a variety of other contractual arrangements. A broad set pf institu-
tional mechanisms also exist for the marketing of feeder livestock. As
might be expected, producer cooperatives play a significant role in these
market transactions as do individual feeders, order buyers and both auction
and central markets.
The literature on cost and pricing efficiency OE markets for livestock
and livestock products is voluminous. Without trying to estimate these
efficiencies we list below briefly some of the continuing concerns expressed
about the markets.
50
51
Livestock Markets: There is widespread concern that producers do not use
existing marketing institutions and mechanisms as effectively as they
might. This is particularly true for futures markets but for various
spot (cash) markets as well. Extensive use of the “Yellow Sheet”, a
daily market news report, as a guide for the bid price of live cattle
by slaughtering firms may be a “thin and risky” source of information for
pricing of beef. This latter issue resulted in the establishment of a Meat
Pricing Task Force by the Secretary of Agriculture in March, 1979. And,
there are other concerns about market pricing information and methods
particularly in areas where livestock markets are few in number and widely
dispersed geographically. Finally, increases in energy costs ancl/orchanges in
the location of animal production (particularly for cattle) may signal
further changes in the location and structure of livestock markets. This
phenomenon appears to warrant research study.
Dairy Marketing: The current pricing system for milk puts substantial
power in the hands of a small number of large producer cooperatives and
governmental agencies. This is resulted in questions about the adequacy
of consumer protection in the pricing process and whether procluct pricing
is regionally equitable and efficient. Some regional price differences
for milk do not appear to be the result of a fully competitive pricing
system.
~g g Marketing: Most concerns center on the thin market of
public sales transactions from which any industry pricing system must now bs
established. This thin market is of particular concern for eggs and, to some
extent, for chickens and turkeys. It results from the very high incidence
of vertical integration in the broiler and egg sectors. T%e concern centers
on the accuracy of publicly quoted prices as a measure of supply and clemancl.
52
The Marketing Bill: Comparecl to all farm food, a lower proportion of con-
sumers ‘ expenditures for food animal products goes to pay the “marketing
bill” for these products anclmore is allocated to “farm value” (Table 11).
But the marketing bill component for food animal products is still high
(33 to 49 percent of prices at retail and, on an absolute basis, rising
rapidly. Thus, marketing and distribution costs are critical components
of food animal product prices at retail. Moreover, the economic activities
in the marketing and distribution of food animal products are important in
their own right generating a large volume of income and employment.
The make-up of the farm-food marketing bill will differ some for food
animal products, as a group, compared to all farm food products. And, it
will differ also for individual food animal products. Despite these
differences, ‘Figure5 provides some useful perspective on the major items
included in the farm-food marketing bill as of 1978. As an individual
component, labor costs at 47 percent of the total represent much the
largest item followed by packaging, 12 percent; transportation, 8 percent;
and corporate profits, 7 percent. In looking ahead to 1980, industry
analysts have projected an increase of from 9-12 percent in the marketing
bill for farm food from the level of 1979, And, with an actual decrease
in labor productivity already registered for 1978 and probably for 1979,
rising labor costs per unit of product along with much higher energy costs
are heavy contributors to this large increase in the marketing bill.
A somewhat different perspective on the incidence of the farm food
marketing bill for food animal products is presented in Table 12. These
1978 data show that the marketing bills for meat and poultry products
53
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Figure 5
Rentd 3-
‘est.etc
)
A profitsPackqing
Transportation is Tntercity rail and truck. Corporate profits arebefore taxes. Other includes utilities, fuel, promotion, local hiredtransportation, insurance, etc.
Source: 1979 Handbook of Agricultural Charts, ESCS, USDA
55
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56
consumed away-from-home exceed by far those for meat and poultry
products consumed at home. And even for dairy products, almost
.43percent of the total marketing bill was associated with products consumed
away-from-home. Thus , marketing of food animal products has changed
dramatically from the time when most products were purchased in the
local food store or butcher shop and prepared and consumed by the
family in the home.
In addition to the regular marketing and distribution services
performed by the private sector, federal, state, and local governmental
agencies provide a broad set of services including the provision of
health inspection, maintenance of sanitation standards, and operation
of a broad set of animal health programs, price support programs, market
orders, market news, import controls, acquisition and disposal of surplus
products by the Commodity Credit Corporation, PL-480 programs, domestic
food aid programs and many others. Though most of these services do not
enter directly as charges in the food marketing bill, they certainly
do affect the economic environment in which the marketing and distribution
processes for food animal products occur. And, they do not come free!
We cannot undertake here to describe in detail the marketing and
distribution activities associated with the food animal industry. Rather,
we attempt only to identify briefly the role and magnitude of the different
components of the marketing and distribution system in order to help
identify key issues needing future research attention.
Transportation: The U.S. food animal industry is highly dependent on a
complex and efficient transportation system both to move massive supplies
of production inputs, including feedstuffs, to producers and to move
57
intermediate products (particularly feeder cattle and feeder pigs) and
final products to their respective destinations. Live animals and
animal products, particularly, must be transported at reasonable cost
and with minimum loss in quantity and quality of cargo. Since most
animals and animal products have a high degree of perishability and bulk,
transportation is a major cost item for the food animal industry. The
transportation component for the farm food marketing bill was estimated
at $10.9 billion in 1978. And, though it is difficult to break transp-
ortation costs down by individual food animal categories, the annual
cost of shipping livestock and meat products to and from slaughter plants
alone was estimated at $800 million for 1975-77. Also, transportation
costs for the widely dispersed dairy sector with its highly perishable
raw milk and manufactured diary products, represent a major component in the
market bill for that sector.
Of particular concern to the food animal industry is the rapid
increase in energy and labor costs which are important in transportation.
But, also of critical importance is the need to keep the nation’s rail and
highway system in effective operating condition. Water transportation is
important to the food animal industry mainly in the movement of some feecl-
stuffs and fuel only, thus increasing the pressure on other higher labor-
and energy-use transportation modes for moving food animal products. In
addition to keeping the physical facilities of the transportation system
in efficient operating condition, there is a critical need to maintain a
system of efficient pricing, rate structure regulation and performance in
both intrastate and interstate transportation. Thus > the outcome of current
discussions relative to deregulation in trucking and rail transportation
58
.
COUICIbe of crucial significance to the food animal industry. With recent
disruptions and cost surcharges in the trucking inciustry duc to fuel
shortages and high prices still freshly in mind, ~ogethec wit~l rail rate
increases of 13 percent in 1979 over year earlier levels, constructive
attention (incluclingperceptive research) needs to be directed to the
transportation system servicing the food animal industry.
Processing-: Until 1977 processing was the largest cost component in the
farm fooclmarketing bill. But, in that year retailing costs moved to
the number one position. The processing component of the farm food
marlceting bill still remains a major item totalling $37,584 million in
1978. Moreover , processing, broadly defined, still remains a major
functional activity in the marketing of food animal products, particularly
for red meat, po~lltry and dairy products. The meat “packing industry is
the largest single component of the food animal processing sector with
total.operating costs (exclusive of the cost of livestock and.other raw
6/materials) of .$8,632million in 1978 — of which 52 percent went for
wages and employee benefits. And, an estimated 163 thousand persons were
employed in meat packing plants and 148 thousand in the fluid milk and
7/cheese industries alone in 1979. —
$/Source: American Meat Institute’s Annual. Financial Review of thePackifig Industry.
~/Source: U.S. Department of Labor, Bureau of Labor Statistics.
59
Among the economic topics receiving concerned attention in the
food manufacturing industry are those relating to degree of concentration?
within the industry and the relationship of size of firms to per unit costs.
In general, the average industry concentration in food and kindred products
is high relative to most industries. For example, the share of total food
manufacturing industry assets owned by the 50 largest firms was 56 percent
in 1974 compared to 41 percent in 1950. And, there have been large declines,
(of the order of one-half) in the total number of food manufacturing firms
in the U.S. since 1947. At least one study has estimated that monopoly power
is present in food processing and has resulted in multi billion doSlar
8/overcharges to consumers. — Despite the above cited trends toward concen-
tration in food processing, however, there has been some decentralization
of the meat packing industry from major terminal market cities into the
major livestock production regions in recent years. And, there remain some
17 National packers (those with $250 million or more in annual sales) and
more
$250
food
than 40 regional packers (those with product sales of $25 million to
million annually). Overall, it does not appear that concentration in
animal product processing is nearly as acute as is the case, for example,
in the dry cereal manufacturing sector of food processing. Raw material
assembly costs are probably an important factor in keeping some dispersion
in the structure and location of the food animal ?roduct processing industry.
qParker, Russell C. and Connor, John F1., “Estimates of Consumer LossDue to Monopoly in the U.S. Food Manufacturing Industries”, ContributedPaper, American Agricultural Economics Association, Blacksburg, VAAugust 6-9, 1978.
60
The technical studies of the National Commission on Food llarketing
provide the most comprehensive perspective available on cost structure
in the food manufacturing industry as of the mid-1960’s. These
technical studies present estimates of cost–scale relationships for
cattle and hog slaughter, broiler and turkey processing and processing
of fluid milk and major manufactured dairy products. The conclusions
reached in these studies were that important scale economies exist in
these phases of food marketing but are achieved by “medium-size” plants
relative to the size of the total industry. For example, most in-plant
economies were estimated to be achievable by plants handling 1 percent
of the poultry supply, 2 percent of the turkey supply and a similar or
smaller portion of the milk supply.
There was clearly a great need for consolidation and growth of
individual firms in food animal product processing in the period.
following World War 11. This was particularly true for dairy and
poultry processing. Such consolidation continues in dairy processing
where the number of butter plants decreased by 34 percent between 1972 and
1977 while production per plant increased by 50 percent. But, much of the
size adjustment in dairy processing plants may now have been accomplished.
For example, as of 1977 butter plants producing 8 million pounds or more
annually accounted for over two-thirds of total production while American
cheese plants producing over 10 million pounds accounted for 54 percent of
the total output of that product. Both a high proportion of new, efficient
plants in the industry and the extremely high cost of new plant construction
suggest a likely moderation in the rate of future change. Some additional
61
trend to decentralization of livestock marketing and meat packin~ on a
selective basis, may occur in response to higher energy costs andlor
to changes in the location of animal product supplies. The scale,
technology and location of dairy and poultry processing facilties,
on the other hand, are probably pretty well set for the near future.
There is strong evidence that labor union practices have retarded
the rate at which some cost efficient operations (principally those
involving centralized meat cutting and boxing) have been adopted in
the meat packaging sector. But, a major part of the cost increases due
to paclcaging, precooking, and other built-in food conveniences features
for food animal products, have resulted from the consumer demand for
them. Labor productivity continues to be a concern since, despite
the adoption of much labor saving technology, labor productivity in
the manufacture of farm originating food increased by only about 1 percent
per year from 1972-77.
Wholesaling and Retailing: Though wholesaling and retailing are rather
distinct marketing activities they are closely related in that wholesaling
activities are set up largely to service retailers and the larger-scale
away-from-home eating establishments. Wholesaling of farm food employed
an estimated 655 thousand people in 1978 and added an estimated $21,903
million to the marketing bill. Retailing, the largest single functional
component of the farm food marketing bill, employed 1,743 thousand persons
in food stores alone and added $39,975 to the market bill. Both wholesaling
and retailing are labor intensive activities with labor costs representing
43 and 48 percent of total costs, respectively. Labor
62
productivity in food stores is a continuing problem as it dropped an
average of 1,2 percent per year between 1972 and 1977 and the drop
continued through 1978 and into 1979.
Table 13 provides a breakdown of the distribution of marketing
costs for key food animal products sold at retail and points up the
importance of the wholesaling and retailing functions, particularly
the latter, to prices for these products. One needs to keep in mind,
moreover, the high proportion of marketing bill costs for meat,
poultry and dairy products that
sector (Table 12).
Our discussion of the food
are incurred in the away-from-home
wholesaling sector will be brief because
it is difficult either to separate this functional sector or to generalize
about it. For example, most large retail chains are integrated into.
wholesaling and perform this latter function even though their primary
business is food retailing. And, some food manufacturing firms are also
integrated into the wholesaling business. As manufacturers sales branches
and offices, representatives of food manufacturers handled about 20 percent
of the food wholesaling business in 1972. Also, some of the big firms
in the rapidly growing food service industry have integrated into the
wholesaling business and even into the contracting for supplies from
producers.
Concentratio~ has increased in the food wholesaling sector since
the early 1960’s. Between 1963 and 1972 the number of wholesale
“establishments” decreased by 8 percent to about 39 thousand. And,
the percentage decline in the number of wholesale “firms” was even
greater. As a group “Specialty Merchants” are the largest in number
among wholesalers and handled about 41 percent of industry sales in
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64
1972. In addition to the manufacturers sales branches and offices mentioned
above, General Line Merchants and Agents and Brokers each handled about 19
to 20 percent of the wholesale business in 1972. As might be expected with
the high concentration rate among food manufacturing firms, concentration
wholesaling was greatest among manufacturers sales branches and offices.
it appears likely that in the future even more control of the wholesaling
function will come from food processors and retailers and from the very
largest firms in the food service industry.
In terms of function, food wholesalers in the future can be expected
to broaden their services and to provide more specialized attention to
in
And,
both
individual firms in the food retailing and food service sectors. Financing,
promotion, site selection, inventory controls and general computer services
are among the services which will likely be expanded by wholesalers.
There has been a big increase in concentration in the food retailing
sector since World War 11 largely as a result of the growth in supermarkets
generally and in supermarket chains, particularly. This structural adjustment
has continued through the 1970’s. In U.S. metropolitan areas the 4 largest
grocery firms’ share of the total grocery sales increased from 46 to 52 per-
cent from 1954 to 1972. And, in 1972, supermarkets with annual sales of
$1 million or more accounted for an estimated 68 percent of total grocery
store sales. By 1978 their share had increased to 77 percent.
The 1970’s also saw a rapid growth in so called “superstores” in which
nonfoods and general merchandise are also sold and “convenience stores”
have grown in nGmber as food outlets during the past 20 years. At the end
of 1977 there were about 32 thousand convenience stores with sales of $9.7
9/billion. – These stores do not, however, account for a very major share
~fRobert E. Frye, “Our FooclDistribution System: Developments and Issues”.Unpublished Paper, Nay, 1979.
65
of total food sales. Finally, though many changes are still occurring
in food retailing, some adjustments are now virtually complete. This
is true, for example, of the shift from home delivery to bulk store
sales of dairy products and eggs.
As in the case of food processing, the emergence of large-scale food
retailing firms coupled with increased concentration within the industry
has led to charges of abusive monopoly powers. And, recent study prepared
by the Joint
overcharges”
Economic Committee of the Congress, estimated that “monopoly
for the four largest food retailing firms totaled $662 million
10/in 1974 or 1.6 percent of sales.— In order to provide some perspective on
the levels of profits in the food processing and retailing sectors, we have
included a comparison of their profit levels for 1963-75 with those in all
manufacturing industries (Table 14). These data suggest that, whether or
not monopoly powers exist, and at least some probably do, the after-tax
profits of firms in food processing and retailing are, at most, a modest
proportion of the total final costs to consumers of food animal products.
The paucity of good evaluative information on profits in the marketing
and distribution sectors of the food animal industry does, however, suggest
the need for solid economic research on this topic.
Food Service: No single portion of the U.S. food industry has changed as
drastically or grown as rapidly in recent years11/
as the food service industry.—
~/llarion, Bruce ~J.,et. al. The Profits and Price Performance of Leading
Food Chains, Joint Economic Committee, U.S. Congress, Government PrintingOffice, Washington, D.C., April 12, 1977.
11/— A quick and comprehensive perspective on this industry can be found in:
Michael Van Dress, “An Overview of the Food Service Industry”, National
Food Review, ESCS, USDA, Summer, 1979.
I
I- m mm mm Om. . . . . . . .
0+0000+!+I-+F-11-IFI!+I+I-.(!+
eo
u$u‘5P+
67
This away-from-home eating component of food distribution has both a
“public” and an “institutional” component of which the former is much
the larger (see Table 12). For those farm foods consumed away-from-
home the marketing bill portion represents about 81 percent of total
consumer expenditures leaving only about 19 percent for farm value.
Among the major contributors to the “public” food service industry
are restaurants, cafeterias fast food outlets, lunch rooms, caterers~
food contractors, food vendors and grocery and department stores
selling meals and snacks. On the institutional side, schools and
hospitals are the largest food service industry markets though there
are a number of smaller ones.
The significance of the food service industry in the marketing
of food can be readily established. Of total consumer expenditures
of $250 billion for food in 1978, more than one dollar in three (or
about $400 per person) was spent via the food service industry.
Fast food places more than doubled their share of sales between
1963 and 1978 going from 15 to 32 percent. And, during the 20 year
period from 1958 to 1978, real sales by fast food outlets increased
more than
sales has
1972 some
700 percent! Volume-wise the big increase in fast food
come with the expansion of franchising in the 1970’s. In
33 thousand fast food outlets dispensed food for $7 billion.
And by 1978, only 6 years later, franchise outlet sales had grown to
$17 billion. Thus, we are even now in the midst of a major growth
and restructuring of food consumption to which the food animal
industry must direct close attention and for which our past research
on food demand is ill equippeci to deal.
68
It would be a mistake to focus attention on fast food outlets to
the exclusion of other important components of the food service industry
or other dimensions of food marlceting and distribution. Yet, a brief
look at the fast food sector does provide some interesting economic
perspective on an industry which handles an,increasing volume of food
animal products. Currently, the four largest fast food firms in order
of size - McDonalds, Kentucky Fried Chicken, Burger King and Dairy
Queen -12/
account for 41 percent of fast food sales. — Thus concentration
in the fast food sector is high. The unusual combination of a few very
large parent firms and numerous franchised outlets appears to fare well
competitively as the result of several key relationships. Large parent
firms can contract with suppliers to ensure dependable supplies and rigid
adherence to product specifications. These parent firms can also integrate
into the wholesaling and processing functions both in order to gear these
activities to their individual needs and to reap the economic rewards
associated with servicing these functions. And large advertising and
promotion expenditures can be made to differentiate products and services
and to develop consumer familiarity and loyalty. It has, in fact, been
estimated that the 20 largest fast food firms spent over $270 million for
media advertising in 1978. This advertising is effectively targeted both
from the standpoint of products and services, on the one hand, and on
appropriate consumer groups (e.g., families, teenagers, etc.) on the
other hand. Improved access to credit and equity capital, effective
utilization of computers and managerial resources and coordinated systems
‘/Charles Handy, “Fast Food Industry: Growth in Establishments andFirm Size.” Unpublished Paper. ESCS, USDA, August, 1979.
69
for building, distributing and merchandising, are all benefits of these
large-scale operations. From the standpoint of franchise holders, the
opportunity to enter the food service business without extensive tech-
nical know how or experience
So are the benefits accruing
are advantages of a participating franchise.
from the advertising and control and
management of products, practices and services provided by the parent
firm.
Clearly, the food animal industry has a big economic stake in
maintaining or expanding the share of their products which move to
consumers via the food service industry. Effective economic research
needs to be targeted at this important component of food demand in order
to assess both the product volume and the mix of products
will represent effective demand in the fwture. And, this
,requires improved knowledge relative to the changing life
for which it
in turn
styles, incomes,
tastes, etc. , of consumers who generate the demand for food service.
Summaq T Perspective
In the process of assessing supply and demand for food animal products
and the changes in their equilibrium levels overtime, one finds it easy to
conclude that some changes are supply driven, other demand driven and still
others are “induced” by the numerous intermediaries in the marketing and dis-
tribution system and by the regulatory agencies affecting the whole food animal
industry. Moreover, effects generated from these different sources are not
mutually independent. Thus , any information system capable of guiding the
future of the industry will need to deal with all of these factors in both
their technical and their economic dimensions.
70
Selected References
&/American Meat Institute. Annual Financial Review of the MeatPacking Industry for 1978.
JIConnor, John M. Competition and the Role of the Lar~est Firmsin the U.S. Food and Tobacco Industries. lI??.29, NC–117, WorkingPaper Series, February, 1979.
~/ Council for Agricultural Science and Technology. Foods From Animals,Quantity, Quality, and Safety, CAS1 Report No. 82, March, 1980.
qCouncil for Agricultural Science and Technology. Impact ofGovernment Regulations on the Beef Industry. Cast Report No. 79,October, 1979.
yDuewer, Lawrence A. and Terry L. Crawford. Alternative RetailBeef-Handling Systems. ERS-661, U.S. Department of Agriculture,ESCS, September, 1977.
. fJ/
10/—
lJ
Q/
Farrell, Kenneth R. Market Performance in the Food Sector, ERS-653U.S. Department of Agriculture, ESCS, 1977.
Freebairn, J.W. and Gordon C. Rausser “Effects of Changes in theLevel of U.S. Beef Imports”. American Journal of AgriculturalEconomics, November, 1975.
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